Don’t Get Stuck with AAirpasses: How To Avoid Risky Customers

The AAirpass Fiasco,

In the 1980s, American Airlines found itself facing a new reality – deregulation. 

With airlines now free to set their own prices and routes, competition became fierce. American, needing a way to stand out and raise some quick cash, hatched a seemingly brilliant plan: the AAirpass.

This wasn’t your average frequent flyer program. For a hefty sum – a quarter-million dollars at the time – customers could buy a lifetime pass to fly first-class anywhere American Airlines went. A “companion” ticket went for $150,000. The thinking went like this: they’d attract high-rolling business executives, bringing in a steady stream of high-paying customers. Plus, the upfront cost would be a nice cash injection for the airline.

Here’s where the plan went off the rails. American underestimated the cunning of frequent flyers. Savvy travelers saw this as the ultimate travel hack, a chance to fly in luxury for life at a fraction of the usual cost. 

However, the plan backfired. Many pass holders were not using the pass as intended, but were instead exploiting every perk and accumulating expenses on extras like in-flight meals and airport lounges. This misuse of the pass led to unforeseen financial strain on the airline.

Plus, the airline still had to pay fees and taxes on each flight, regardless of the ticket price. The AAirpass holders, meanwhile, became a drain on resources, turning a potential goldmine into a financial black hole.

As a small-to-medium enterprise (SME) owner, you’re likely always on the lookout for ways to attract new customers and grow your business. The temptation to offer can’t-miss deals or rock-bottom pricing understandable — after all, who doesn’t love a great bargain?

However, what may seem like a surefire strategy to capture market share could actually end up backfiring and causing serious harm to your bottom line. 

The culprit? A phenomenon known as “adverse selection.”

Adverse selection occurs when the customers most drawn to your offering are actually the riskiest ones from a business perspective. They possess information about their own profiles and behaviors that you, as the seller, don’t have – and they use that asymmetry to their advantage.

The danger of adverse selection is that it can slowly, silently erode your profitability over time. Customers who seem lucrative on the surface may actually have hidden characteristics that make them far less desirable. In the insurance industry, for instance, adverse selection leads healthier individuals to opt out of coverage, leaving providers stuck with a disproportionate number of high-risk policyholders.

Lessons from the AAirpass

As an SME, you can’t afford to let adverse selection jeopardize your hard-earned gains. That’s why it’s crucial to be proactive in identifying and mitigating this threat. Here are some key strategies to consider:

• Thoroughly screen potential customers. Don’t just look at the immediate revenue opportunity – dig deeper to understand their full risk profile, payment history, and long-term value potential. Rigorous vetting upfront can save you a lot of headaches down the road.
•  Design pricing and packaging strategically. Avoid offering overly simplistic, one-size-fits-all deals that may disproportionately attract high-risk customers. Instead, consider tiered offerings or dynamic pricing models that align with the true value you provide.
• Leverage data and analytics. Use available information to build predictive models that can help you identify potentially problematic customer segments. This allows you to either avoid them altogether or price your products/services accordingly.
• Foster long-term customer relationships. Getting to know your customers as individuals, not just transactions, can give you vital insights into red flags. Ongoing communication, feedback loops, and engagement are key.

The reality is, adverse selection is an ever-present threat that successful SMEs must actively manage.

 By understanding the dynamics at play and implementing the right protective measures, you can attract a healthy, sustainable customer base – and avoid the same pitfalls that have tripped up even the most renowned enterprises. 

The AAirpass became a cautionary tale for businesses everywhere. A good deal can backfire if you don’t consider who it might attract and the hidden costs that come along with it.

American Airlines eventually discontinued the program, but not before a handful of frequent flyers enjoyed a lifetime of luxury travel at the airline’s expense.